e-Tailers Are Slouching Towards Profitability

Online retailers have “marginally improved their performance” while taking concrete steps to increase overall profitability, according to a newly released industry study.

The second quarter survey of online retailers by Shop.org and The Boston Consulting Group found that customer acquisition costs have decreased and sales per visitor have risen slightly.

The report also found that 86 percent of survey participants have specifically addressed the issue of profitability and 40 percent re-negotiated or canceled their portal deals. (It seems clear that making expensive payments to an AOL or an Amazon.com may not always be the smartest move for an e-tailer; just ask the folks at the recently bankrupt Living.com.)

The findings, based on survey responses from 66 North American online retailers, show that customer acquisition costs continued to decline from a high of $71 during the fourth quarter of 1999, to $45 in the first quarter of this year and now to $40.

This is due in part to a shift away from relatively expensive television advertising to online advertising and marketing. While this is a significant decline, overall customer acquisition costs remain higher than in the third quarter of 1999 ($35).

“…online retailers have improved performance on the key metrics that have the largest impact on the bottom line — customer acquisition cost, conversion rates, and loyalty rates,” said James Vogtle, director of e-commerce research at Boston Consulting. “Online retailers will need to continue with this disciplined approach in order to reach

The survey found that online retailers are spending less of their marketing budgets on pure brand awareness and are now focusing more on customer retention. This
strategy is beginning to pay off as almost half of their revenues in the second quarter came from repeat buyers, up significantly from 1999.

“The average online retailer requires three purchases to break even on the acquisition cost of each new customer,” said Kate Delhagen, chairman of Shop.org’s Committee on Internet Shopping Research. “With the high cost of acquiring new customers, many online retailers are focusing their efforts on increasing the frequency of purchases from existing customers, in order to reduce acquisition spending and achieve profitability more quickly”

Other findings from the survey include:

  • Order conversion rates have improved slightly in the second quarter of this year (1.9 percent) compared to 1999 (1.8 percent). Order conversion is derived from the number of orders received divided by the total number of visits to a site during a specific time frame
  • The percent of marketing budgets spent online increased to 59 percent in the second quarter from 49 percent in the first quarter.
  • Returns as a percent of revenue dropped to 5.7 percent in the second period, down from 7.6 percent in the first quarter.

The survey is part of Shop.org/BCG’s continuing research program. Shop.org is a 400-plus member trade association focused exclusively on Internet retailing and direct-to-consumer marketing technologies. The Boston Consulting Group is a general management consulting firm that operates in 32 countries around the world.

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